November 18, 2002
To: The US Securities and Exchange Commission
Subject: File # S7-40-02
Comments on Proposed Disclosure Rules for Section 407 of the Sarbanes-Oxley Act of 2002
Definition of "Financial Expert"
The proposed definition is very limited and substantially narrower than an expert in "financial matters of the firm." It primarily describes an accounting practitioner. Experience in auditing and preparation of financial statements does not imply unique expertise in financial decisions, controls or analysis. Broad management, financial and educational experiences lead to understanding the questions to ask and are most important for effective Audit Committee oversight.
The fundamental requirement for expertise on the Audit Committee is persons with strong knowledge of the principles of accounting, financing alternatives and consequences and the operations of the organization.
Audit Committees are a group of knowledgeable persons who are both financially and business literate. They function effectively through interaction and sharing knowledge and perspectives. Having one person as "the Financial Expert" on an Audit Committee creates an erroneous impression of the function of the Committee and spotlights one person as more responsible - making that person a target. This almost certainly leads to few individuals willing to serve in the "financial expert" role. There will be a substantial shortage of available "experts;" this is especially true for Mutual Funds (Registered Investment Companies) with more limited financial structures and transactions to review.
A substantial disservice to investors may be created by requiring notification of the presence of a person who is a "Financial Expert" on the Audit Committee. This generates the impression that the lack of a single financial expert means inadequacy in the audit review process, whereas the whole Audit Committee is needed to function effectively through their combination of experience and knowledge.
Responsibilities of the Audit Committee
In addition to reviewing the standard financial statements and ascertaining their material accuracy, reviewing business or structure decisions in cases where there are alternate accounting and financial treatments available, examining alternatives and their implications, and approval of each decision is a requisite requirement for good Audit Committee performance. Ultimately, the fundamental criterion is whether the committee members hold highest the best interests of their public constituents.
/S/ Richard E. Hughs
Independent Trustee and Audit Committee Member, US Global Investor's Accolade Fund Series.